Solutions to Chapter 5 Exercises

Exercise 5.1

See Chapter 5 Exercises.xls for additional solution detail.

(a) 0.008966 = (1−0.008750) × (0.009045)

(b) 0.11215 = (1−0.18600) × (1−0.17969) × (0.16795)
(c) $146,228.75

Exercise 5.2

See Chapter 5 Exercises.xls for additional solution detail.

Claim cost for a CMM benefit, with a $1,000 deductible, and 80% coinsurance until $2,000 out-of-pocket
expenses occur, after which the benefit is 100% = $2,270.69

Exercise 5.3

See Chapter 5 Exercises.xls for additional solution detail.

After 10% inflation, the claim cost for a CMM benefit, with a $1,000 deductible, and 80% coinsurance
until $2,000 out-of-pocket expenses occur, after which the benefit is 100% = $2,545.28

Claim cost inflation = 10%

Leveraged inflation = $2,545.28/$2,270.69 − 1 = 12%

The leveraged inflation is the inflation on the amount paid by the insurer.

Exercise 5.4

Assumes all months have 30 days.

(1) Premium Received

Let X = date the premium was received
X~ Uniform (0, 1), where X = 0 = January 1 and X = 1 = December 31
E ( X ) = (0+1) / 2 = 0.5
Weighted average date of premium received in months = 12(0.5) = 6
Weighted average date of premium received = July 1

(2) Premium Earned

Let X = date the premium was received
X ~ Uniform (0, 1), where X = 0 = January 1 and X = 1 = December 31
Let Y = date of the midpoint for the period between X and December 31
Y = ( X +1) / 2
 1
E (Y ) = E ⎡⎣ X2+1 ⎤⎦ = 12 ∫ ( x +1) dx = 12 ⎡ x + x ⎤
1
= 12 ⎡⎣ 12 + 1⎤⎦ = 0.75
2

x =0 ⎣2 ⎦ x=0
Weighted average date of premium earned in months = 12(0.75) = 9
Weighted average date of premium earned = October 1
(3) Claims Incurred
See Chapter 5 Exercises.xls for additional solution detail.

Weighted average claim incurral date = July 5

(4) Claims Paid

See Chapter 5 Exercises.xls for additional solution detail.

Weighted average claim payment date = August 3

Exercise 5.5

Assumes all months have 30 days.

(1) Premium Received

Z = random variable representing the incurral month, where Jan = 1 … Dec = 12
X = random variable representing the date of claim incurral
Z ~ Discrete Uniform (12), where p ( Z = z ) = 1/12 for 1 ≤ z ≤ 12
X | Z ~ Uniform (a, b)
E[ X ] = E [ E[ X | Z ]] = ∑ z { E[ X | Z = z ] × p ( X = z )}

See Chapter 5 Exercises.xls for additional solution detail.

Weighted average date of premium received = July 1

(2) Premium Earned

Y | Z = date of the average exposure of the premium earned during the calendar year, given month z
For 1 ≤ z ≤ 11, all premium has been earned during the calendar year (not necessarily during month z),
therefore y = end of month z
For example (assuming equal days per month, i.e., 30):
x1 = 1/ 01, premium 100% earned by 2 / 01 >> y1 = 1/15
x 2 = 1/ 02, premium 100% earned by 2 / 01 >> y 2 = 1/16
#
x30 = 1/ 30, premium 100% earned by 2 / 30 >> y 30 = 2 /14
Therefore, E[Y | January] = 1/ 30, the end of month z = January.

For z = 12, not all of the premium will be earned during the calendar year, each policy issued average
exposure is halfway to the end of the calendar year.
E (Y | December) = E ⎡ X2+1 December ⎤ = ∫ x=0.9167 x2+1 × ( 1−0.9167 ) dx
1
1
⎣ ⎦

( )
1
= 12 × (12) × ⎡ x + x ⎤
2

⎣2 ⎦ x =0.9167

⎣ 2
2
( ) ( 2
2

⎦ )
= 12 ⎡ 1 + 1 − 0.9167 + 0.9167 ⎤ = 0.9792,

this corresponds to 11.75 months or Dec 23

E[Y ] = E [ E[Y | Z ]] = ∑ z { E[Y | Z = z ] × p ( Z = z )}

See Chapter 5 Exercises.xls for additional solution detail.

Weighted average date of premium earned = July 15

(3) Claims Incurred

Changing from an annual premium mode to a monthly premium mode, does not affect the claims.
The results are the same as Exercise 5.3 (3).
Weighted average claim incurral date = July 5

(4) Claims Paid

Changing from an annual premium mode to a monthly premium mode, does not affect the claims.
The results are the same as Exercise 5.3 (3).
Weighted average claim payment date = August 3